Air Force Procurement: Accuracy of Commercial Activity Study for Niagara Falls Air Force Reserve Base

Published by the Government Accountability Office on 1990-01-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Accuracy of
Commercial Activity
Study for Niagara Falls
Air Fbree Reserve Base
 United States
 General Accounting OffIce
 Washington, D.C. 205011

 National !Security and
 International ABairo Division


January      25, 1990

The Honorable         Donald B. Rice
The Secretary         of the Air Force
Dear Mr. Secretary:
This report responds to a provision                     in the fiscal    year 1990
andl'991 Defense Authorization                   Act, dated November 29, 1989,
and!a request by Congressman John J.. L.aEalc,e, dated                             i
November 2, 1989, that we report to you on our review of the
accuracy of the 1989 commercial, acti,vity                    study at Niagara
Falls Air. Force -.^^,..*.
                        I. Rese,rve     Base   and  whether   the  study was
conducted in basically                the same manner and considered
similar.c,o,st      factors         as a commercial activity        study at a
similar     installation.             Regarding the accuracy of the study,
we were asked to determine whether the contractor
underestimated -.,^   "."the,,,.. number ,.o,f personnel needed to perform the
re.quired ‘tasks and whether the estimated unemployment
compensation costs for federal workers expected' to 'be
displac,ed'is       bn allowable          addition    to the contractor's
costs.      On January 19, 1990, we briefed your staff on the
results    of our review.
The commercial activity       study for the Niagara Falls Air
Force Reserve Base was conducted in accordance with the
Office of Management and Budget's h&B> Circular                 A-76 and
the Air Force's implementing        regulations.       We found no
discrepancies   in the manner in which the Air Force conducted
its study and in the Air Force's results.              We also found no
support that the contractor        underestimated      the number of
personnel needed to perform base support services or that
estimated unemployment costs for displaced              federal workers
should be considered      as a specific     addition     to the
contractor's  costs.      In addition,     we examined another
commercial activity     study for a similar        installation     and
determined that the way in which the studies were conducted
and the cost factors      that were considered were not
significantly  different.

            To implement OMB's Circular     A-76, each government agency is
            to review its commercial activities     once every 5 years to
            determine whether it is more economical to retain work
            in-house or to contract     out for it.  The Air Force reviewed
            base support servi"ces at the Niagara Falls Air Force Reserve
            Base and determined it would be more economical to contract
            out the services than retain them in-house.       The cost
            comparison for Niagara Falls showed that the government
            would save about $143,000 over a 3-year period by
            contracting    out for the required base support services.    As
            a result,   the Air Force awarded a contract to Intelcom
            Support Services,     Inc., scheduled to begin on April 1, 1990.
            Effected federal employees at Niagara Falls alleged that
             Intelcom underestimated        the number of employees needed to
            perform the required base support services effectively.                       We
            found no support for this allegation.                We examined the files
            of the Air Force technical           evaluation     team responsible       for
            evaluating       the proposals for the Niagara Falls base support
            services.        The team had several concerns about staffing,
            including      the number of staff needed for snow removal and
            fueling.       As a result,    Intelcorn added five positions          and
            their associated costs to its proposal.                Intelcorn's   final
            bid included 62.4 full-time           equivalent     positions,    56 for the
            fixed portion and 6.4 for the indefinite               portion of the
            contract.        The team believed that Intelcom could
            satisfactorily       perform the contract        with this number of

            Effected federal employees at Niagara Falls also alleged
            that the government would incur unemployment costs of
            $221,728 for federal employees who would be displaced           when
            the base support services are contracted        out.   They further
            alleged that unemployment costs should be added to the cost
            of contracting.      The OMB policy does not provide for
            unemployment costs to be specifically        considered in a cost
            comparison, since, according to an OMB official,         these
            costs are too unpredictable      to $&recast accurately.
            Consistent    with this policy,    ir Force Regulation     26-l
            states that unemployment cornf ensation is not to be included
            in A-76 studies.      However, OMB and Air Force policies       allow
            unemployment costs to be indirectly       offset to some extent in
            the cost comparison by the addition       to the contractor's
            costs of 10 percent of the in-house personnel related costs.

                                                            ’   ‘“,I:,        ”

                                                     ”                   ‘,   ’

Unemployment costs are not only difficult       to predict,  but
they appear to be minimal.       For example, in 1985 we
reported1 that we queried 129 involuntarily       separated
government employees as a result of 31 decisions        to
contract  out.     Responses from 94 showed that 53 received
some unemployment compensation and/or public assistance.          We
estimated that these individuals       received a total of
$215,000.     Therefore,   we concluded that it was unlikely   that
any of the decisions     to contract   out would have been
different   if these costs had been included in the cost
We compared the Air Force's commercial activity      study for
Niagara Falls with the study for Minneapolis-St.      Paul Air
Force Reserve Base and found no significant    differences     in
the manner in which the studies were conducted or the cost
factors that were considered.    Intelcom was the low contract
bidder at Minneapolis-St.   Paul and at Niagara Falls.
However, the cost comparisons showed it was more cost
effective  to retain the services in-house at Minneapolis-St.
Paul, whereas at Niagara Falls it was more cost effective         to
contract  out for them.
We found that the in-house bid and Intelcorn's     bid were lower
at Niagara Falls.    The in-house bid for Niagara Falls
included three fewer positions    and was $452,000 less than
the in-house bid at Minneapolis-St.    Paul.   Intelcam's  bid
for Niagara Falls included more staff-hours     and a higher
profit  rate than its bid for Minneapolis-St.     Paul but was
lower in price because of the lower wage rates at Niagara
The primary difference    between the two studies was because
Niagara Falls has much lower one-time conversion costs than
Minneapolis-St.     Paul. Conversion costs are added to the
contractor's    costs in a commercial activity     study and
consist of such factors    as severance pay, relocation      and
homeowner's assistance,    and retraining.      Conversion costs
are related to the characteristics       of the in-house personnel
performing the function    under study.     For example, severance
pay is commensurate with salary,       years of service,   and age,

lDOD Functions Contracted Out Under OMB Circular A-76:   cost
and Status of Certain Displaced Employees (GAO/NSIAD-85-90,
July 12, 1985).

At Minneapolis-St. Paul an estimated 31 people would
receive severance pay totaling  $342,000, whereas at Niagara
Falls an estimated 27 people would receive $194,000.
To respond to the Defense Authorization              Act and the
Congressman's request,        we agreed with congressional         staff to
concentrate      on (1) reviewing the number of personnel
Intelcom plans to apply to the contract,              (2) determining
whether unemployment compensation costs for displaced
federal employees is an allowable           addition    to the
contractor's      costs, and (3 1 determining        whether the
commercial activity       studies for Niagara Falls and
Minneapolis-St.       Paul were conducted differently         or
considered different       cost factors.      We reviewed appropriate
documents and interviewed         officials   at Air Force
Headquarters,      Washington, D.C.; Air Force Reserve
Headquarters,      Warner Robins Air Force Base, Georgia; and
Niagara Falls Air Force Reserve Base, New York.                We also met
with Intelcom officials,         Niagara Falls Air National        Guard
officials,    and Niagara Falls employee and union
We conducted our review from November 1989 to January 1990
in accordance with generally accepted government auditing

We are sending copies of this report to the Chairmen, House
and Senate Committees on Appropriations       and on Armed
Services;   Congressman John J. LaFalce; the Secretary of
Defense; the Director,       Office of Management and Budget; and
other interested    parties.
Please contact me at (202) 275-4268 if you or your staff
have any questions concerning this report.         Other major
contributors     to this report are Carl F. Bogar, Assistant
Director,    National   Security and International   Affairs
Division,    Washington, D.C.; and Raymond P. Griffin,


E*aluator-in-Charge,      John D. Carrera, Evaluator,   and
Joseph L. Santiago,      Evaluator, New York Regional   Off ice.
Sincerely       yours,

        Force Issues



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